China's transition to electric vehicles

In recent decades, China's rapid economic growth has enabled more and more consumers to buy their own cars. The result has been improved mobility and the largest automotive market in the world - but also serious urban air pollution, high greenhouse gas emissions, and growing dependence on oil imports.

To counteract those troubling trends, the Chinese government has imposed policies to encourage the adoption of plug-in electric vehicles (EVs). Since buying an EV costs more than buying a conventional internal combustion engine (ICE) vehicle, in 2009 the government began to provide generous subsidies for EV purchases. But the price differential and the number of buyers were both large, so paying for the subsidies became extremely costly for the government.

As a result, China's policymakers planned to phase out the subsidies at the end of 2020 and instead impose a mandate on car manufacturers. Simply stated, the mandate requires that a certain percent of all vehicles sold by a manufacturer each year must be battery-powered.

To avoid financial penalties, every year manufacturers must earn a stipulated number of points, which are awarded for each EV produced based on a complex formula that takes into account range, energy efficiency, performance, and more. The requirements get tougher over time, with a goal of having EVs make up 40 percent of all car sales by 2030.

This move will have a huge impact on the worldwide manufacture of EVs, according to William H. Green, the Hoyt C. Hottel Professor in Chemical Engineering. "This is one of the strongest mandates for electric cars worldwide, and it's being imposed on the largest car market in the world," he says. "There will be a gigantic increase in the manufacture of EVs and in the production of batteries for them, driving down the cost of both globally."

But what will be the impact of the mandate within China? The transition to EVs will bring many environmental and other benefits. But how much will it cost the nation? In 2016, MIT chemical engineering colleagues Green and then-graduate student I-Yun Lisa Hsieh PhD '20 decided to find out. Their goal was to examine the mixed impacts of the mandate on all affected factors: battery prices, manufacturing costs, vehicle prices and sales, and the cost to the consumer of owning and operating a car.

Based on their results, they could estimate the total societal cost of complying with the mandate in the coming decade. (Note that the Chinese government recently extended subsidy support for EVs for two years due to the Covid-19 pandemic and that this analysis was performed before that change was announced.)

Looking at battery prices
"The main reason why EVs are costly is that their batteries are expensive," says Green. In recent years, battery prices have dropped rapidly, largely due to the "learning effect": As production volumes increase, manufacturers find ways to improve efficiency, and costs go down. It's generally assumed that battery prices will continue to decrease as EVs take over more of the car market.

Using a new modeling approach, Green and Hsieh determined that learning effects will lower costs appreciably for battery production, but not much for the mining and synthesis of critical battery materials. They concluded that the price of the most widely used EV battery technology - the lithium-ion nickel-manganese-cobalt battery - will indeed drop as more are manufactured. But the decline will slow as the price gets closer to the cost of the raw materials in it.

Using the resulting estimates of battery price, the researchers calculated the extra cost of manufacturing an EV over time and - assuming a standard markup for profit - determined the likely selling price for those cars. In previous work, they had used a variety of data sources and analytical techniques to determine "affordability" for the Chinese population - in other words, the fraction of their income available to spend on buying a car. Based on those findings, they examined the expected impact on car sales in China between 2018 and 2030.

As a baseline for comparison, the researchers first assumed a "counterfactual" (not true-to-life) scenario - car sales without significant adoption of EVs, so without the new mandate. Under that assumption, annual projected car sales climb to more than 34 million by 2030.

When the subsidy on EV purchases is eliminated and the mandate is enacted in 2020, total car sales shrink. But thereafter, the growing economy and rising incomes increase consumer purchasing power and drive up the demand for private car ownership. Annual sales are on average 20 percent lower than in the counterfactual scenario, but they're projected to reach about 30 million by 2030.

The researchers also projected the breakdown in sales between ICE vehicles and battery EVs at three points in time. According to that analysis, in 2020, EVs make up just 7 percent of the total (1.6 million vehicles). By 2025, that share is up to 21 percent (5.4 million). And by 2030, it's up to 37 percent (11.2 million) - close to the government's 40 percent target. Altogether, 66 million EVs are sold between 2020 and 2030.

Those results also track the split between two types of plug-in EVs: pure battery EVs and hybrid EVs (which are powered by both batteries and gasoline). About twice as many pure battery EVs are sold than hybrid EVs, even though the former are more expensive due to the higher cost of their batteries. "The mandate includes a special preference for cars with a longer range, which means cars with large batteries," says Green. "So carmakers have a big incentive to manufacture the pure battery EVs and be awarded extra points under the mandate formula."

For the consumer, the added cost of owning an EV includes any difference in vehicle expenses over the whole lifetime of the car. To calculate that difference, the researchers quantified the "total cost of ownership," or TCO, including the purchase cost, fuel cost, and operating and maintenance costs (including insurance) of their two plug-in EVs and an ICE vehicle out to 2030.

Their results show that before 2020, owning either type of plug-in EV is less costly than owning an ICE vehicle due to the subsidy paid on EV purchases. After the subsidy is removed and the mandate imposed in 2020, owning a hybrid EV is comparable to owning an ICE vehicle. Owning a pure battery EV is more expensive due to its high-cost batteries. Dropping battery prices reduces total ownership cost for both types of EVs, but the pure battery EV remains more expensive out to 2030.

Cost to society
The next step for the researchers was to calculate the total cost to China of forcing the adoption of EVs. The basic approach is straightforward: They take the extra TCO for each EV sold in each year, discount that cost to its present value, and multiply the resulting figure by the number of cars sold in that year. (They exclude taxes embedded in the purchase prices of the vehicle, of electricity and gasoline, and so on, as the society will have to pay other taxes to replace that lost revenue.)

Using that methodology, they calculated the incremental cost to society of each EV sold in each year as well as the extra cost per kilometer driven, assuming that the vehicle has a lifetime of 12 years and is driven 12,500 kilometers each year. The results show that the incremental cost of owning and driving an EV decreases from 2021 to 2030. The cost declines more for pure battery EVs than for hybrid EVs, but the former remain more costly.

By combining the per-car cost to society with the number of cars sold, the researchers calculated the total extra cost incurred. In their results, the total number of EVs sold in a year more than offsets any decrease in per-vehicle cost, so the incremental cost to society grows. And that cost is sizeable. On average, the transition to EVs forced by the mandate will cost 100 billion yuan per year from 2021 to 2030, which is about 2 percent of the nationwide expenditure in the transport sector every year.

During the 10 years from 2021-30, the annual societal cost of the transition to almost 40 percent EVs is equivalent to about 0.1 percent of China's growing gross domestic product. "So the cost to society of forcing the sale of EVs in place of ICE vehicles is significant," says Hsieh. "People will have far less money in their pockets to spend on other purchases."

Other considerations
Green and Hsieh stress that the high societal cost of the forced EV adoption must be considered in light of the potential benefits to be gained. For example, switching from ICE vehicles to EVs will lower air pollution and associated health costs; reduce carbon dioxide emissions to help mitigate climate change; and reduce reliance on imported petroleum, enhancing the country's national energy security and balance of payments.

Hsieh is now working to quantify those benefits so that the team can perform a proper cost-benefit analysis of China's transition to EVs. Her initial results suggest that the monetized benefits are - like the costs - substantial. "The benefits appear to be the same order of magnitude as the costs," she says. "It's so close that we need to be careful to get the numbers right."

The researchers cite two other factors that may impact the cost side of the equation. In early 2018, six Chinese megacities with high air pollution began restricting the number of license plates issued for ICE vehicles and charging high fees for them. With their lower-cost, more-abundant "green car plates," EVs became cost-competitive, and sales soared.

To protect Chinese carmakers, the national government recently announced that it plans to end those restrictions. The outcome and its impacts on EV sales remain uncertain. (Again, due to the pandemic, policies restricting car ownership have mostly been relaxed for now.)

The second caveat concerns how carmakers price their vehicles. The results reported here assume that prices are calculated as they are today: the cost of manufacturing the vehicle plus a certain percentage markup for profit. With the new mandate in place, automakers will need to change their pricing strategy so as to persuade enough buyers to purchase EVs to reach the required fraction.

"We don't know what they're going to do, but one possibility is that they'll lower the price of their battery cars and raise the price of their gasoline cars," says Green. "That way, they can still make their profits while operating within the law." As an example, he cites how U.S. carmakers responded to Corporate Average Fuel Economy standards by adjusting the relative prices of their low- and high-efficiency vehicles.

While such a change in Chinese automakers' pricing strategy would lower the price of EVs, it would also push up average car prices overall, because the total car sales mix is dominated by ICE vehicles. "Some people in China who would otherwise be able to afford a cheap gasoline car now won't be able to afford it," says Hsieh. "They'll be priced out of the market."

Green emphasizes the impact of the mandate on all carmakers worldwide. "I can't overstate how hugely important this is," he says. "As soon as the mandate came out, carmakers realized that electric vehicles had become a major market rather than a niche market on the side." And he believes that even without subsidies, the added expense of buying an EV won't be prohibitive for many car buyers - especially in light of the benefits they offer.

However, he does have a final concern. As more and more EVs are manufactured, global supplies of critical battery materials will become increasingly limited. At the same time, however, the supply of spent batteries will increase, creating an opportunity to recycle critical materials for use in new batteries and simultaneously prevent environmental threats from their disposal. The researchers recommend that policymakers "help to integrate the entire industry chain among automakers, battery producers, used-car dealers, and scrap companies in battery recycling systems to achieve a more sustainable society."

This research was supported through the MIT Energy Initiative's Mobility of the Future study.

This article appears in the Autumn 2020 issue of Energy Futures, the magazine of the MIT Energy Initiative.

Paper: "Transition to electric vehicles in China: Implications for total cost of ownership and cost to society."

Paper: "Incorporating multiple uncertainties into projections of Chinese private car sales and stock."

Paper: "Learning only buys you so much: Practical limits on battery price reduction."

Paper: "Transition to electric vehicles in China: Implications for private motorization rate and battery market."

Related Links
Mobility of the Future
Car Technology at SpaceMart.com

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